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EXECUTIVE COMPENSATION OVERSIGHT AFTER 

THE DODD–FRANK WALL STREET REFORM AND 

CONSUMER PROTECTION ACT 

HEARING 

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

SECOND SESSION 

SEPTEMBER 24, 2010 

Printed for the use of the Committee on Financial Services 

Serial No. 111–160 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

BARNEY FRANK, Massachusetts, Chairman 

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

CHARLES A. WILSON, Ohio 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

BILL FOSTER, Illinois 

ANDRE ́ CARSON, Indiana 

JACKIE SPEIER, California 

TRAVIS CHILDERS, Mississippi 

WALT MINNICK, Idaho 

JOHN ADLER, New Jersey 

MARY JO KILROY, Ohio 

STEVE DRIEHAUS, Ohio 

SUZANNE KOSMAS, Florida 

ALAN GRAYSON, Florida 

JIM HIMES, Connecticut 

GARY PETERS, Michigan 

DAN MAFFEI, New York 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

ADAM PUTNAM, Florida 

MICHELE BACHMANN, Minnesota 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

BILL POSEY, Florida 

LYNN JENKINS, Kansas 

CHRISTOPHER LEE, New York 

ERIK PAULSEN, Minnesota 

LEONARD LANCE, New Jersey 

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III) 

C O N T E N T S 

Page 

Hearing held on: 

September 24, 2010 .......................................................................................... 1 

Appendix: 

September 24, 2010 .......................................................................................... 35 

WITNESSES 

FRIDAY, SEPTEMBER 24, 2010 

Alvarez, Scott G., General Counsel, Board of Governors of the Federal Reserve System ......................................................................................................... 4 

Baily, Martin Neil, Senior Fellow, The Brookings Institution ............................. 22 

Cross, Meredith B., Director, Division of Corporation Finance, U.S. Securities 

and Exchange Commission .................................................................................. 5 

Steckel, Marc, Associate Director, Division of Insurance and Research, Federal Deposit Insurance Corporation ................................................................... 7 

Stuckey, Darla C., Senior Vice President, Policy & Advocacy, Society of Corporate Secretaries and Governance Professionals ............................................. 25 

APPENDIX 

Prepared statements: 

Alvarez, Scott G. ............................................................................................... 36 

Baily, Martin Neil ............................................................................................ 49 

Cross, Meredith B. ............................................................................................ 60 

Steckel, Marc .................................................................................................... 70 

Stuckey, Darla C. ............................................................................................. 86 

(1) 

EXECUTIVE COMPENSATION OVERSIGHT 

AFTER THE DODD–FRANK 

WALL STREET REFORM AND 

CONSUMER PROTECTION ACT 

Friday, September 24, 2010 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The committee met, pursuant to notice, at 10 a.m., in room 2128, 

Rayburn House Office Building, Hon. Barney Frank [chairman of 

the committee] presiding. 

Members present: Representatives Frank, Watt, Moore of Kansas, Green, Hodes, Ellison; Bachus, McHenry, Posey, and Lance. 

The CHAIRMAN. The hearing will come to order. I apologize, I lost 

track of the time, and I am sorry. We will begin with the gentleman from Texas, Mr. Green, for an opening statement for 3 minutes. 

Mr. GREEN. I thank you, Mr. Chairman, and I thank the witnesses for appearing today. I am honored, Mr. Chairman, that you 

called this hearing and I thank you for doing so. 

I would like to mention very briefly a few pieces of statistical information that I think are exceedingly important. Currently, we 

have in this country a poverty rate that consumes about 43.6 million Americans. And this poverty rate is juxtaposed to persons who 

are making inordinate amounts of money and paying a capital 

gains tax. The numbers speak for themselves. We had in 2007 a person who made $69.7 million working for 

one of our leading firms. And by the way, I salute people who make 

large amounts of money. I want people to make as much as they 

can honestly earn. But it is interesting to note that $7.25 cents an 

hour, what this person has made in 1 year would take a minimumwage worker 4,878 years to make. That person who made the $69.7 

million is making about $9.3 per second. And, of course, this person 

has reason to envy the hedge fund manager who in 2007 made $3 

billion, which would take a minimum-wage worker about 198,000 

years to make, as the person making the $3 billion makes roughly 

$400 per second. Finally, I had mentioned the hedge fund manager who made $4 

billion in 2009 which would take a minimum-wage worker 265,252 

years to make, the hedge fund manager making about $534 per 

second. 

I mention these not because I begrudge the persons who make 

these sums of money. I mention it because we have people in this 

2 

country who work very hard, who make minimum wage, and it is 

very unfortunate that the people who support the maximum-wage 

earners, the persons who can make these hundreds of dollars per 

second, $400 per second, $534 per second, support the maximumwage earners but would eliminate the minimum wage. Support the 

maximum-wage earners paying a capital gains tax of 15 percent, 

but would eliminate the minimum wage. The minimum-wage workers deserve as much consideration as the maximum-wage workers. 

I stand for helping both, and I will not allow the minimum-wage 

workers to be left behind. 

I yield back the balance of my time. 

The CHAIRMAN. The gentleman from Florida is recognized for 

how much time— 

Mr. POSEY. I thank you, Mr. Chairman. And I want to thank you 

for calling this hearing. 

The CHAIRMAN. Three minutes for the gentleman from Florida. 

Mr. POSEY. I want to thank you for calling this hearing, Mr. 

Chairman. This is a subject which has long interested me. When 

we had the major bank CEOs here, one of the members asked them 

for their compensation and they said what it was. And then they 

were asked what it was the year before as the ship was sinking 

and, to be sure, they included bonuses, and they went from I think 

about $12 million to $60 million, something like that. I wouldn’t 

want to be held to that. And it left you to wonder, obviously, if one 

of them had gone down in a plane crash, if in fact their stockholders would have been hurt to the tune of $12 billion, $20 billion, 

$60 billion in their absence. 

So the question that begs for an answer, of course, is what relationship there is between the people on these compensation committees and the people they compensate? I hope you will address 

that in your remarks today and we will discuss it in questions: 

How much transparency is there now? How much transparency is 

opposed? Have there ever been any findings or prosecutions for an 

improper relationship for which the citizens, the stockholders, suffered? 

Those are some of the interests that I have and that I hope you 

will address today. And I want to thank the chairman again for 

holding this hearing. 

The CHAIRMAN. Any other requests for time on our side? If not, 

I will just take a few minutes to say that the genesis of this hearing, frankly, was an article in the New York Times by Robert 

Shiller with whom we have had good conversations, in which he 

wrote that he thought executive compensation had to be addressed, 

and I noted that we had in fact done that. He wrote about the 

Squam Lake Group which consisted, as I recall, of economic officials from the second Bush Administration, I believe, and the Clinton Administration not currently involved. 

And we noted that we had done some things, and I invited them 

to come and testify. We have given the regulators authority and we 

would like them to talk about how they are going to use it. One 

thing we should be clear on: At no point did any of our legislation, 

either on say-on-pay, which applies to all corporations or the more 

specifically financial ones here, have we addressed the dollar 

amount. That is not our job and we do not try to fix the amounts. 

3 

We did, in the say-on-pay, try to empower the shareholders. In 

this, the financial area, the problem is not the level but the incentive. There is a widespread view among many analysts and subscribed, it seemed to be, by all the regulators including those appointed by the Bush Administration and the Obama Administration, that the incentive structure was the problem. That a problem 

of heads I win, tails I break even, did not appropriately incentivize 

people. 

So what the legislation does is not in any way to set dollar 

amounts or authorize anybody to set dollar amounts but to deal 

with the question of the incentive structure and try to empower the 

regulators and to mandate them to so structure the rules so that 

people are not incentivized to take risks excessively, by which we 

mean assist, whereby people take a risk and if it pays off, they do 

well; and if they take a risk and it does not do well at all, they 

break even. That is not a rational incentive structure. 

And so we are pleased to have with us a couple of economists 

who have been—one of the economists who has been involved in 

this and also someone from the industry. And that is the genesis 

of this hearing, it did come from an article by Professor Shiller and 

a representative of the group, the Squam Lake Group, will be here. 

We have given the authority to the regulators and we want to 

talk about how it should be used. 

The gentleman from Alabama. 

Mr. BACHUS. Thank you, Mr. Chairman. General Counsel Alvarez and Directors Cross and Steckel, I am not sure how you were 

assigned the job to draft these rules, but I suppose you are going 

to use your real names on the draft; is that right? I guess it is a 

thankless job and it is a difficult job, but it could be more difficult 

if you were charged with looking into the pay of athletes or entertainers. So there is probably some silver liner there. 

Obviously, this is a subject that is very popular and almost everything has been said about it that can be said, but at least this 

hearing, the scope of this hearing is limited to executive compensation oversight after the Dodd-Frank Wall Street Reform and Consumer Protection Act, so this hearing is limited, and I think maybe 

something newsworthy will come out of the hearing. 

We look forward to your testimony, but I know you have a difficult job and there are literally thousands of different opinions on 

what you ought to do. And it is a difficult subject. I thank you. 

The CHAIRMAN. Any further requests for time? If not, we will 

begin with our witnesses and we appreciate their testifying. We 

should note that when we originally called this hearing, the assumption was the House would be in session. It is not, and therefore you have fewer members, but that may or may not distress 

you. 

I remember touring a Hollywood studio in 1981 in my first year, 

because I was on the Judiciary Committee and dealing with copyrights and they were giving me a tour of the studio. They were 

making a movie with Nastassja Kinski, and I forget who else, and 

it involves people who turned themselves into panthers or who 

were turned into panthers by some other force. And when we 

toured the site, the people from the studio apologized to me because the panthers weren’t there. I said I wanted to be very clear. 

4 

As far as I was concerned, no one ever had to apologize to me for 

not putting me in the presence of panthers. 

And so maybe, that is the way the witnesses feel; no apology is 

needed for the fact that there are fewer panthers here than there 

might otherwise be. But in any case, we do appreciate their coming, and we will begin with Scott Alvarez and your statement, Mr. 

Alvarez. 

STATEMENT OF SCOTT G. ALVAREZ, GENERAL COUNSEL, 

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM 

Mr. ALVAREZ. Thank you very much, Chairman Frank, Ranking 

Member Bachus, and all the members of the committee. I appreciate the opportunity to discuss the oversight of incentive compensation practices, an area in which the Federal Reserve has undertaken significant initiatives. 

Incentive compensation is an important and useful tool for attracting and motivating employees to perform at their best. At the 

same time, poorly designed or implemented compensation arrangements can provide executives and other employees with incentives 

to take imprudent risks that are not consistent with the long-term 

health of the financial organization. To help address these problems, the Federal Reserve led the development of interagency guidance on incentive compensation that was adopted by the Federal 

banking agencies last June. 

We are also close to completing a horizontal review of incentive 

comp practices at large complex banking organizations. Section 956 

of the Dodd-Frank Act provides important support to these efforts 

by requiring that the Federal banking agencies, the SEC, the 

NCUA, and the Federal Housing Finance Agency prescribe joint 

standards governing incentive compensation. 

The guidance adopted by the Federal banking agencies is based 

on three key principles: 

First, incentive comp arrangements should provide employees 

with incentives that are appropriately balanced so they do not encourage employees to expose their organizations to imprudent risk. 

Second, these arrangements should be compatible with effective 

controls and risk management. 

And third, these arrangements should be supported by strong 

corporate governance, including active oversight by the organization’s board of directors. 

The guidance applies to senior executives. It also applies to nonexecutive employees who either individually or as a group have the 

ability to expose the banking organization to material amounts of 

risk. The guidance recognizes that activities and risks may vary 

significantly across banking organizations and across employees 

within a particular banking organization. As a result, one approach 

to balancing risk and reward will certainly not work for all. 

Moreover, the guidance includes several provisions designed to 

reduce burdens on smaller banking organizations. At the same 

time, in order to help ensure that large banking organizations 

move rapidly to bring their arrangements into compliance with the 

principles of safety and soundness, last fall the Federal Reserve 

initiated a special horizontal review of incentive comp practices at 

a number of large complex banking organizations. We are currently 

5 

reviewing a substantial amount of information collected in this horizontal review and expect to provide each firm with individualized 

feedback this fall. 

After the assessments are completed, implementation of the incentive comp plans will become part of the supervisory expectations 

in normal supervisory process for each of these organizations. 

Firms have put forth significant effort to find constructive solutions 

to the issues we and they have identified. 

In addition, over the course of the horizontal review, we have observed and encouraged real, positive change in incentive compensation practices. While significant improvements have been achieved, 

it should not be surprising that time will be required to implement 

all the improvements that are needed, given firms’ relatively unsophisticated approach to risk incentives before the crisis, the complexity of compensation issues, and the large number of employees 

who receive incentive comp at large banks. 

Importantly, the Federal Reserve expects large complex banking 

firms to make significant progress to improve the risk sensitivity 

of their comp for the 2010 performance year. After 2010, the Federal Reserve will prepare and make public a report on trends and 

developments and incentive comp practices at banking organizations in order to encourage improvements throughout the industry. 

Section 956 of the Dodd-Frank Act supports these efforts and improves the ability of Federal regulators to collect information about 

incentive compensation arrangements at a wide range of financial 

firms. 

The Dodd-Frank Act also empowers the appropriate Federal 

agencies to prohibit any type or feature of incentive comp payment 

arrangements that encourage inappropriate risks by a covered financial institution. By expanding the scope of coverage to include 

many large nonbanking firms, as well as supporting the Federal 

banking agencies’ efforts, the Dodd-Frank Act helps level the playing field and reduces the potential for sound practices at banking 

firms to be undermined by arrangements at other financial competitors. 

I appreciate the opportunity to describe the Federal Reserve’s efforts in this area and I am happy to answer any questions. 

[The prepared statement of Mr. Alvarez can be found on page 36 

of the appendix.] 

The CHAIRMAN. Our next witness is Meredith Cross, who is the 

Director of the Division of Corporation Finance at the SEC. 

STATEMENT OF MEREDITH B. CROSS, DIRECTOR, DIVISION OF 

CORPORATION FINANCE, U.S. SECURITIES AND EXCHANGE 

COMMISSION 

Ms. CROSS. Good morning, Chairman Frank, Ranking Member 

Bachus, and members of the committee. My name is Meredith 

Cross, and I am the Director of the Division of Corporation Finance 

at the U.S. Securities and Exchange Commission. I am pleased to 

testify on behalf of the Commission today on the topic of executive 

compensation oversight. 

The Commission’s role in this important area has traditionally 

been to require timely, comprehensive, and accurate disclosure to 

investors about a company’s executive compensation practices and 

6 

procedures. One challenge the Commission faces is that compensation practices continually evolve and become increasingly complex. 

The Commission has revised its disclosure rules to address these 

changes, including most recently in 2006 and 2009. 

Currently, we are focused on implementing the requirements in 

the Dodd-Frank Act which address an array of compensation 

issues. I will briefly summarize those provisions and our plans to 

implement them. 

Section 951 requires a shareholder advisory say-on-pay vote at 

all companies subject to our proxy rules at least once every 3 years, 

and a separate advisory vote on the frequency of say-on-pay votes 

at least once every 6 years. This section also calls for new merger 

proxy disclosure about, and a shareholder advisory vote on Golden 

Parachute arrangements. Although no rulemaking deadline is specified, the Commission’s goal is to adopt final rules in time for the 

2011 proxy season, since the say-on-pay and say-on-frequency advisory votes apply to shareholder meetings beginning January 21, 

2011. 

Section 957 requires the national securities exchanges to amend 

their rules to prohibit brokers from voting uninstructed shares on 

certain matters including executive compensation. On September 9, 

2010, the Commission approved changes to the New York Stock 

Exchange rules that implement this mandate, and the Commission 

expects to approve corresponding changes to the rules of the other 

exchanges soon. 

Section 952 requires the Commission to mandate new listing 

standards concerning compensation committee independence and 

compensation consultant conflicts of interest, and to adopt related 

disclosure requirements. These rules generally must be prescribed 

by July 16, 2011, and the Commission anticipates proposing these 

rules soon. 

Sections 953 and 955 direct the Commission to amend our rules 

to require three new disclosures concerning executive compensation: 

First, the relationship between executive compensation actually 

paid and the financial performance of the company. 

Second, total annual compensation of the CEO, the median total 

annual compensation of all other employees, and the ratio between 

these amounts. 

And third, whether employees or directors are permitted to engage in certain hedging transactions against the downside risk of 

company equity securities. 

Section 954 requires the Commission to adopt rules mandating 

changes to listing standards so that listed companies will have to 

adopt and disclose clawback policies for recovering compensation 

from current and former officers in certain circumstances. 

The Act does not specify deadlines for rulemaking under Sections 

953, 954, or 955, but the Commission’s goal is to publish proposals 

by July 2011. 

Finally, Section 956 requires the Commission and other Federal 

regulators to jointly prescribe regulations or guidelines applicable 

to covered financial institutions, including, from the SEC’s perspective, registered broker-dealers and investment advisers with assets 

of a billion dollars or more. 

7 

The regulations or guidelines, which must be prescribed no later 

than April 21, 2011, will require disclosure to the appropriate Federal regulators of the structures of incentive-based compensation 

and prohibit incentive-based payment arrangements that the regulators determine encourage inappropriate risks. 

We are working with our fellow regulators to develop these regulations or guidelines within this timeframe. The SEC’s Web site 

has a series of e-mail boxes to which the public can send comments 

before the various Dodd-Frank implementation rules are proposed 

and the official comment begins. 

So far, comments on the executive compensation provisions range 

from those expressing general concern about compensation practices, to others providing detailed suggestions for implementation of 

specific provisions of the Act. 

The Commission is committed to ensuring that our disclosure 

rules provide investors the information they need to make informed 

voting and investment decisions and to implementing the provisions of the Dodd-Frank Act, addressing compensation issues as required by the Act. 

Further, we are committed to working with our fellow regulators 

to prescribe regulations or guidelines for covered financial institutions to prohibit incentive-based payment arrangements that encourage inappropriate risk, as mandated by the Act. 

Thank you again for inviting me to appear before you today. I 

would be happy to answer any questions you may have. 

[The prepared statement of Ms. Cross can be found on page 60 

of the appendix.] 

The CHAIRMAN. And finally, Mr. Marc Steckel, who is the Associate Director of the Division of Insurance and Research at the 

FDIC. 

STATEMENT OF MARC STECKEL, ASSOCIATE DIRECTOR, DIVISION OF INSURANCE AND RESEARCH, FEDERAL DEPOSIT INSURANCE CORPORATION 

Mr. STECKEL. Good morning, Chairman Frank, Ranking Member 

Bachus, and members of the committee. I appreciate the opportunity to testify on behalf of the FDIC at this hearing on the oversight of executive compensation after passage of the Dodd-Frank 

Act. 

The structure of employee incentive compensation programs can 

affect banks’ risk profiles and long-term performance. Without 

question, compensation programs that rewarded short-term profitability without accounting for risk were one in a series of factors 

that contributed to the recent financial crisis. 

As deposit insurer, the FDIC brings a unique perspective to the 

regulation of incentive compensation practices. When a bank’s compensation programs encourage the poorly managed risk-taking that 

precedes many bank failures, the Deposit Insurance Fund pays for 

the consequences of that excess. 

Prior to the passage of the Dodd-Frank Act, the FDIC began to 

increase its efforts to curb the risky compensation practices that 

helped precipitate the financial crisis. As early as November 2008, 

the FDIC and other Federal banking agencies issued a statement 

addressing the need to rein in risky compensation practices in an 

8 

interagency statement on meeting the needs of creditworthy borrowers. 

In January of this year, the FDIC issued an advance notice of 

proposed rulemaking to examine whether the FDIC’s risk-based assessment system should be updated to consider the risks presented 

by poorly designed incentive compensation programs. The ANPR 

solicited public comment on whether the deposit insurance assessment system could be used to complement supervisory standards— 

to incentivize banks to use compensation programs that are even 

less risky than those allowed under safety and soundness guidance 

and regulations. 

Using the deposit insurance pricing system in such a way would 

be consistent with existing features of the system, which, for example, provides a comparative advantage to banks that choose to operate with capital levels greater than those mandated by supervisory standards. 

The FDIC has reviewed the comments received in response to the 

ANPR and continues to work with the proposal. While our work 

isn’t done yet, I can share that the Federal Deposit Insurance Corporation does not seek to limit the amount of compensation that 

employees can earn. Our view is that addressing the structure of 

compensation programs would be a more effective approach. 

Moreover, we do not believe that a one-size-fits-all approach is 

the best policy either. Our view is that employee incentive compensation programs that are balanced and aligned with the longterm interest of all the banks’ stakeholders present lower risk to 

the Deposit Insurance Fund. 

Based on the comments received from the public, academics, and 

others, and our own research, FDIC staff has identified certain features of incentive compensation programs that we believe can help 

protect the Deposit Insurance Fund. 

First, boards of directors and senior managers of financial institutions must take primary responsibility for ensuring incentive 

compensation programs effectively align employees’ motivations 

with the long-term interests of the institution. 

Second, portions of employees’ incentive compensation should be 

deferred and subject to meaningful lookback mechanisms that 

allow awards to be reduced or rescinded if the original justification 

or the award proves over time to be invalid. Employees who have 

a portion of their incentive compensation deferred have less incentive to engage in risky behavior and, furthermore, must be concerned with the long-term health of their employer to ensure that 

they will receive the award at a later date. 

In early 2010, the FDIC joined the Federal Reserve to review 

compensation practices used by large banking companies. Later, in 

June of this year, the FDIC joined the other Federal banking agencies in issuing the interagency Guidance on Sound Incentive Compensation Policies. 

Turning to the implementation of the compensation provisions of 

the Dodd-Frank Act, I would note that Section 956 is the provision 

that most involves the FDIC. This section will strengthen the authority of the FDIC and other regulators over incentive compensation practices at covered financial institutions. 

9 

The FDIC has begun discussions with other regulators on how to 

implement the requirements of Section 956. The FDIC will continue to work with our fellow regulators and continue to seek ways 

to bring our unique perspective and capacity as deposit insurer to 

bear on this important issue. 

I appreciate the opportunity to testify and will be happy to answer any of your questions. 

[The prepared statement of Mr. Steckel can be found on page 70 

of the appendix.] 

The CHAIRMAN. I thank all of you. 

First of all, let me ask—we did try to work with you— the provisions of the bill that you all work with, my impression is that those 

are generally consistent with the direction you were going in on 

your own. 

Are there any things in the bill that could be a problem for you 

and that need to be fixed? We don’t think so, but my sense is that 

we were basically empowering you and encouraging you to do what 

you wanted to do anyway. 

Mr. Alvarez? 

Mr. ALVAREZ. I agree with you, Mr. Chairman. We think this has 

been very helpful. If there is anything that comes up as we get further into this process, we will certainly come talk with you. 

The CHAIRMAN. Anybody else? 

Ms. CROSS. We agree. 

The CHAIRMAN. The question, then, is what we are told of course, 

is nice try, but all those smart business people will outwit all those 

bureaucrats and they will come up with some new ways. I think 

we anticipated that by giving you general authority not to circumscribe. 

But let me ask you, do you believe—first of all, you have obviously begun talking to and have been talking to some of the people 

you variously supervise. What is your sense of their approach? My 

own view is that, frankly, if this is done uniformly, a number of 

companies would welcome it; that is, we have control for the competitive advantage, that if everybody is under a set of fair rules, 

they appreciate that because you don’t have a kind of a competitive 

effect and the reaction you are getting from the various institutions 

under your jurisdiction. 

Mr. Steckel, let’s start with you. 

Mr. STECKEL. Thank you. We got comments on the Advance Notice of Proposed Rulemaking that we issued earlier this year. We 

got over 15,000 responses and most of them—in fact predominantly, they were in favor of us pursuing some approach. The minority of the comments we got were not supportive, and a lot of 

those were sort of on technical matters, and there were a few that 

were just philosophically opposed to the government having any 

role in compensation. 

The CHAIRMAN. Of course the FDIC had moved—the Federal Reserve, before we acted, but I take it the statute is in general consult with the direction were you moving in. 

Mr. STECKEL. That is right. I think the statute is supportive of 

the approach that we were pursuing. 

The CHAIRMAN. Let me ask you the final question I have, which 

is the argument, yes, but all those smart people in the financial inVerDate Nov 24 2008 18:42 Dec 17, 2010 Jkt 062685 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 K:\DOCS\62685.TXT TERRIE
10 

stitutions will outsmart all you stodgy bureaucrats and all of us benighted politicians and find ways around all this. 

A two-part question. Is there any indication that they are trying 

to do that? And if there is, do we need to give you more authority 

in case they do? Let’s start with Mr. Alvarez. 

Mr. ALVAREZ. I think one of the things that is helpful here is 

that the banking institutions at least understand the problem as 

well and accept the problem as well. So we don’t sense the motivation to get around what we are trying to do. We find the institutions are really embracing the opportunity to limit risk in incentive 

compensation. 

I think your first two points, though, were very key to this; we 

are not trying to limit the level of compensation. We are not putting caps on salaries, so there is less incentive to try to get around 

that. We are trying to align incentives and aligning incentives is 

what the industry wants to do as well. And also by having this 

broadly based across all banking and financial firms, we remove 

the disincentive. I think firms were very worried that if they were 

the first one to move, the first one to limit this compensation, they 

would lose the best people, and we are taking that away. 

The CHAIRMAN. I think that was one of the things we had in 

mind, which is as you were doing this through your various agencies, unless you could have all done it in total lockstep, which is 

hard to do, there would have been a complaint about institutional 

advantage versus another. 

Ms. Cross? 

Ms. CROSS. I would first note this will be a new role for the SEC 

as it relates to the broker-dealer and investment adviser compensation oversight. So my fellow regulators have a head start, but we 

are learning from them and working with them to get there. I 

think there are a few points worth noting that should make this 

successful. I think first off is that it is a principle-based approach 

as opposed to caps and so it is hard to find—avoid a principle, the 

principle being that you are not supposed to structure your compensation to create inappropriate risks. 

Another aspect that I think makes this successful is that the 

compensation committee is responsible for oversight of compensation, at least as to higher paid executives, and they are subject to 

fiduciary duties and they will be accountable; and there will be the 

say-on-pay vote so there are enough different pieces of this to make 

it have a lot of sunshine and a lot of shareholder input. 

And then lastly we have—the SEC adopted disclosure requirements last year that would require disclosure if you have risks that 

expose you—have compensation programs that expose you to inappropriate risks. So I think that combination of factors suits us well 

and it should be successful. 

The CHAIRMAN. Thank you. Mr. Steckel, do you have anything 

you want to add? 

Mr. STECKEL. Yes, I do. There are two points, I think. The FDIC 

has pursued a lot of thinking around the idea of deferral. Large bonuses can be awarded and in many cases are earned and deserved. 

We don’t have an argument about that, but in some cases they 

have been paid out but later the risks that were assumed blow up 

and cause problems for an awful lot of people and sometimes the 

11 

public interest. We think meaningful lookback mechanisms are an 

important part of this. 

Also we have explored the topic of aligning employees’ interests, 

incenting employees to consider all of the banks’ stakeholders. We 

think current practice currently aligns employees’ interest with 

those of shareholders pretty well, probably to the detriment of 

some other stakeholders. 

The CHAIRMAN. Thank you. 

Not as a question, but as to procedure, we are going to be going 

to the second panel, which includes Mr. Baily who is, again, a representative of the Squam Lake Group. So I would hope that either 

you or some of your staff could stay behind. We thought that was 

a very thoughtful, bipartisan cross-Administration approach, and 

we hope you would able to listen to what they say and work with 

them as well. 

Mr. Bachus? 

Mr. BACHUS. Thank you, Chairman Frank. In my opening statement I mentioned entertainers and athletes. But the distinction 

that I would argue and I think is correct is athletes and entertainers don’t lose billions of dollars of the assets of their corporations, and therefore there is no negative impact on the shareholders and on the broader economy. And certainly in the run-up 

to the Wall Street crash, we had numerous instances of traders or 

employees who took what I would call bad-tail risk, what you all— 

if that is the proper word for it—which actually resulted in insolvency for those institutions, to the shareholders, and taxpayers and 

the general economy suffered. So there are obviously—I think to 

address this and financial reform was the proper thing, and I want 

to make that clear. 

Incentive compensation packages, I think all Republicans would 

agree with our members in the majority, a need to be consistent 

with safety and soundness practices, particularly if you have a Federal backstop or Federal safety net. 

As we found with systemic risk, our large corporations I think it 

is essential, because of the interconnectivity of the economy, as we 

have all learned. 

I do think with bad-tail risk, that is something I would assume 

you are all going to focus on, because we found out that really one 

employee, or one or two employees can bring down the largest insurance company in America. I think bad-tail risk, you have defined it, or the regulators or the industry, as a low probability of 

occurring, but if it does occur, a very high risk of threatening the 

insolvency of the institution. So I would say that is something that 

you really need to focus on. 

I don’t know with smaller companies where there is not a Federal backstop, not a systemic risk if the role is not a little bit different. But let me say this; your testimony was very thoughtful, 

every one of you. 

Let me conclude with a question. I usually ask questions. That 

was a statement. But I do want to make it clear to Chairman 

Frank and to the public that there is widespread consensus not 

only among the public, but I think within the financial industry 

and within the Federal regulators and all of us, that compensation 

12 

practices can threaten the safety and soundness of institutions and 

that there has to be some governance and oversight of that. 

My question is, Nell Minow testified last year and she said, ‘‘I 

have a low confidence in politicians and bureaucrats.’’ So she actually addressed us in the least favorable terms, but I will change 

that to Members of Congress and government officials, that she has 

very little confidence in them being able to review incentive compensation plans at financial institutions not to micromanage. She’s 

afraid, and I think that is a fear we all have, that there will be 

too much micromanagement. How will your agency embark on this 

joint rulemaking and supervision without micromanaging compensation? 

I will just ask, do you see that as a problem or could it be a problem? 

Mr. ALVAREZ. So the approach that we have taken is, first, we 

are not trying to set the level of salary of individual employees, we 

agree we are not good at that; that is up to the corporation to deal 

with itself. So we have been focusing on structure and process. We 

are making sure the board of directors is involved in the decisionmaking. We are making sure that the management can explain 

why it awards bonuses in one situation and not in other situations. 

We think that in order to deal with things like tail risk, the corporation should take into account deferral practices and clawback 

practices and a variety of other practices that are being developed 

by the industry, by academics, by HR professionals, risk management professionals, and bringing that to bear so the risks that 

come about from incentive compensation are not unintended and 

don’t encourage greater risk to the organization. 

So we are not about micromanaging the actual pay for individuals. We are about making sure the incentive structure and process 

leads to a good result. 

Mr. BACHUS. And if I could get the other two to answer? 

Ms. CROSS. Although we are at the beginning of this, from the 

SEC’s perspective, we have the same approach in mind. And I don’t 

think we have any interest in micromanaging the pay. We want to 

make sure we do what Congress directed us to do, which is to work 

with our fellow regulators to come up with standards that should 

decrease the risk of incentives that are dangerous. 

Mr. BACHUS. Okay, thank you. 

Mr. STECKEL. The FDIC has taken a fairly slow approach to this, 

because as you study this and you try to do good policy, it does become apparent that it is difficult and we want to avoid unintended 

consequences. I agree with the others in that we do not want to 

micromanage. We will not be setting pay levels. But I think conceptually we do have an interest in the structure of compensation and 

that large discretionary awards in many cases should at least in 

part be deferred to see if the tail risk does come up and cause a 

problem later. 

We have spent a lot of time talking to industry professionals over 

the past year to help us form our views, and we are familiar with 

the work of the Squam Lake Group which has influenced our 

thinking somewhat. 

13 

Mr. BACHUS. Thank you very much. I appreciate it. I think your 

written testimony is going to be very helpful to us and I think, too, 

to the industry and to the public. 

The CHAIRMAN. The gentleman from North Carolina. 

Mr. WATT. Thank you, Mr. Chairman. I think I will pass. I was 

hoping to try to get to hear the second panel’s testimony before I 

left, so I am going to try to expedite that. This testimony is very 

clear. So, Mr. Chairman, I am passing. 

The CHAIRMAN. The gentleman from Florida, I guess, was here 

first by Republican rules. 

Mr. POSEY. Thank you, Mr. Chairman. 

The CHAIRMAN. We will get to you. 

Mr. POSEY. I kind of want to echo the comments made by the 

gentleman from Alabama. Your intent and your advice is thoughtful and well-intended and I hope will be very effective. But if we 

tend ever to use a cannon to kill a sparrow, it causes a little bit 

more collateral damage than we intend sometimes. And I just want 

to express that I think the more complex you make the regulations, 

as the chairman said, the more wiggle room you are going to have 

and the more plans to circumvent it or take away the intent of 

what you are doing. 

I think probably the absolute best accountability that we can 

have is the absolute best possible transparency, and I am not sure 

how all the compensation was arrived at. I am sure much of it was 

made in contractual deals downstream that said, if you do this you 

are going to get this. And so it may not have been decisions made 

after the fact at all, and may not in the future be made after the 

fact. It may be a predetermined set of guidelines that you may or 

may not have any control over. 

I think with the transparency goes responsibility to have strict 

enforcement and prompt prosecution for violations. As we know, at 

the SEC we don’t have a long history of that. And the FDIC activities that I have seen most recently in my district with the bank 

regulators gives me less confidence than ever in that agency. I 

think they are—just as I mentioned in some discussion yesterday— 

going off in a wrong direction out of fear or self-protection or whatever. 

But I would appreciate during whatever time is left if you could 

explain briefly the difference between a typical—and I don’t mean 

everyone would fit in that category—but a typical executive compensation and the relationship between the compensation committee and the chairman, or whoever they are compensating, and 

the difference between that relationship in the future as you foresee it under your guidelines. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Was there a need for comment? 

Mr. POSEY. I would like a comment briefly from each of them, if 

you don’t mind. 

The CHAIRMAN. I am sorry, go ahead. 

Mr. STECKEL. The FDIC, as a policy goal, I think our focus is on 

material risk-takers. We are not interested in targeting many, 

many bank employees who may get small referral bonuses or small 

end-of-year performance bonuses that in no way could influence 

them to affect the overall health of an institution. But some higher 

14 

paid employees can take those sorts of risks and can get paid an 

awful lot of money for that. I think we would tend to focus on those 

employees. There is really not a problem to fix with lower paid employees, I don’t think. 

Ms. CROSS. I will mention a couple points. Under the Act, there 

will now be a requirement for listed companies that the compensation committee be comprised solely of independent directors, and 

there will be enhanced disclosures about compensation committee 

independence. So I think that might get at part of your concern. 

On the who will do this work and what is their relationship to 

the people that they are overseeing, boards of directors in general 

are responsible for risk oversight at companies. Sometimes they 

delegate that to a committee like a risk committee. 

At companies these days, what has been happening is the compensation committee stays responsible for the executive compensation and so including, for example, the CEO pay, and there would 

be the requirement for independence in the future. And then the 

risk oversight would be from the board overall and that would be 

for the broader employee programs. 

So I think there will be several different checks and balances 

within the board, and particularly strengthened by what you did in 

the Act. 

Mr. ALVAREZ. I agree with the previous two about the involvement of the board of directors, and independent compensation committee in particular, in reviewing the CEO salary as you raised. 

The point I would add is that for the most senior executives, I 

think we place particular emphasis on deferral of incentive compensation awards with adjustment of those awards as the risks mature and show up in an organization, so that CEOs in particular 

have their incentive compensation adjusted for the health of the 

company and the risks that show up in the company in the future. 

Not all risks show up immediately, so they need some time for 

those to mature and we would like those to be reflected in the incentive compensation award. 

Mr. POSEY. Can I ask a follow-up question, Mr. Chairman? 

Thank you. 

But suppose that I am the person in charge of hiring a CEO for 

my big bank, and I go to you and I say, look, I am going to pay 

you the average salary, $800,000 a year, and I am going to pay you 

a bonus based on, hypothetically, let’s say 1 percent of the net profits. And he performs. I got what I wanted, he gets what he wanted; 

it will be $4 trillion under those circumstances. But he wrecked us 

in the meantime. What are you going to do? 

Mr. ALVAREZ. The expectation is that the incentive compensation 

award would have a way of reducing—deferring that payment. So 

that 1 percent that you spoke of, the bonus wouldn’t be paid immediately; it would be deferred over some period of time to allow the 

company to realize whether it has been wrecked. And if losses do 

indeed show up, then that award would be reduced. And what that 

does is, that removes the incentive for the CEO to take big risks 

immediately because they know those will show up in a reduction 

in their incentive compensation at a future time. 

Mr. POSEY. I think that would be—one more question, since we 

don’t have very many people. 

15 

The CHAIRMAN. We are already 2 minutes over. 

Mr. POSEY. Okay. 

The CHAIRMAN. The gentleman from Texas, thanks to the generosity of the gentleman from Kansas. 

Mr. GREEN. Thank you, Mr. Chairman. Again, I thank you and 

the witness as well. I would like to just briefly explain why in my 

opinion it is very important to talk about the amount of the compensation. If we don’t talk about the amount—and I am not begging the witnesses to do so—but it is important for us to do so. If 

we don’t talk about the amount of the compensation, we don’t really get an understanding as to why people would assume the types 

of risks that they assume, why they have this incentive to do these 

things. 

And systemic risk is not created by persons who make minimum 

wage, not created by persons who are making $50,000, $60,000, or 

$70,000 a year, generally speaking. This systemic risk is created by 

persons who make hundreds of dollars per second. I mentioned the 

CEO who made $534 per second, which in about 28 seconds allows 

him to make what a minimum worker makes all year. This is the 

kind of compensation what we are talking about. 

And I applaud the bill, I applaud Chairman Frank, and Chairman Dodd. I applaud you for indicating that we are not going to 

micromanage the pay of individuals; that is not what it is about. 

It is about making sure that the pay doesn’t produce systemic risk, 

that is what it is about. But people in the American public have 

to understand what the pay is, so that they can see why people assume this type of risk and why they will do these kinds of things. 

It is huge. The amounts of money are escalating, they are not deescalating. The amount of executive compensation has been consistently going up, while creating this gap between low-income workers 

and maximum-income earners. We are doing the right thing by 

putting into place regulations that will curtail the taking of systemic risk, which, in my opinion, helped to create the crisis that 

we had to contend with. 

And finally I will say this, as I am about to make my exit. I have 

spoken longer than I actually intended to, but I do want to say 

something about the athletes, if I may, and whether they bring 

down a team. If they don’t perform, the tickets don’t sell. If the 

tickets don’t sell, the stockholders do lose money. But that is besides the point. 

The point that I really would make in terms of making a distinction between the athletes and some of these persons who make 

$500 a second is that the athletes pay ordinary income taxes, the 

hedge fund manager pays capital gains tax, 15 percent ordinary income; it could be 36 to 40 percent depending on how you count it. 

But it is not about athletes, it is about systemic risk, and it is 

about the inordinate amounts of moneys that I salute people for 

making because they have a talent to make, but that in some way 

can create liability for others when systemic risk is produced. 

Mr. Chairman, I thank you and I yield back the balance of my 

time. 

The CHAIRMAN. The gentleman from New Jersey. 

Mr. LANCE. Thank you, Mr. Chairman. 

16 

Good morning to you all. I think this is a very important discussion. The bill states regarding incentive-based compensation that 

the regulation community will decide what is inappropriate. 

Could each of you briefly give me your thoughts as to where you 

might be headed, as to what you might consider to be inappropriate. And I know it is a very broad question, but your initial 

thoughts as to that. 

Mr. STECKEL. I think one thing that comes to mind is an exorbitantly large guaranteed bonus that gets paid regardless of the performance of the institution. 

Mr. LANCE. And would you likely place an amount as to what is 

exorbitantly large? 

Mr. STECKEL. No, I don’t think we are prepared to do that, and 

I am reluctant to. 

Mr. LANCE. So ‘‘inappropriate’’ would be translated as exorbitantly large. 

Mr. STECKEL. I think we need to have some policy discussion. 

Mr. LANCE. Yes. Ms. Cross? 

Ms. CROSS. I would describe it in a more principle-based fashion 

as pay where the risks to the institution outweigh the rewards to 

the institution. So you would need to consider, looking at the type 

of pay structure, whether it has that impact. And if it does, it is 

inappropriate. You shouldn’t be paying people more to expose the 

company to more risk than the company would be rewarded if it 

worked out well. 

Mr. LANCE. Thank you. Mr. Alvarez? 

Mr. ALVAREZ. I agree with Ms. Cross. It is very nuanced, there 

is no number, there is no automatic piece. It is about the risk that 

is incented by the compensation and whether that is something the 

company can handle. 

Mr. LANCE. Thank you. I am sure we will be reviewing it with 

you as the process continues. Shareholders, of course, will have the 

right on say-on-pay. I think the bill may be somewhat ambiguous 

as to whether it should be an advisory or binding vote. 

Does the panel have a position on that? I think that is particularly directed at Ms. Cross. 

Ms. CROSS. I am happy to address that. I think the bill is actually clear that it is nonbinding as it relates to both say-on-pay and 

say-on-frequency. 

Mr. LANCE. Yes. 

Ms. CROSS. There is some ambiguity as to whether the frequency 

vote is nonbinding, but our view is, reading the entire provision, 

that the part at the end that says it is a nonbinding vote applies 

to the whole Section, so— 

The CHAIRMAN. If the gentleman would yield, that is certainly 

our intent, and if ever they felt we needed to clarify it, we would 

I am sure be able to do that quickly. But the intent was and, I 

think, in fact it is nonbinding. 

Mr. LANCE. Thank you. That is clarifying. And I am pleased that 

the SEC is of that opinion, and I certainly defer to the Chair. 

Thank you, Mr. Chairman. I yield back the balance of my time. 

The CHAIRMAN. Let me say, by the way, if I can have a minute 

of unanimous consent. One reason that has to be nonbinding is 

that if it was binding, you couldn’t pay them anything. It is just 

17 

a practical thing. And the English experience which we have looked 

to is that nonbinding is pretty influential. 

The gentleman from Kansas. And I appreciate his deferring to 

our colleague from Texas. 

Mr. MOORE OF KANSAS. Thank you, Mr. Chairman. One of the 

major concerns that continues to be raised by my friends across the 

aisle and the business community is a lack of certainty when it 

comes to the new rules businesses face. But given the near collapse 

of our financial system, I don’t know how anyone can responsibly 

argue that a complete overhaul of our financial rules, as we did 

with the Dodd-Frank Act, was not warranted. And while businesses want certainty, they also want well-thought-out rules that 

are not hastily written, creating unintended consequences. 

Given this strain between speed and quality rulemaking, what 

steps are your agencies taking to implement the new rules quickly, 

while also performing due diligence to improve executive compensation rulemaking? 

Mr. ALVAREZ. The banking agencies have already issued guidance. We sought public comment from the industry and from consumer advocates and others about the policies. And we have already begun, actually, our horizontal review or examination of the 

practices at large organizations, which involves a dialogue with 

them about how best to improve their systems, the philosophy they 

bring to incentive compensation, and then the principles that we 

are trying to get them to adopt. 

Mr. MOORE OF KANSAS. Thank you. Ms. Cross? 

Ms. CROSS. With regard to the SEC’s rulemaking initiatives, both 

for the executive compensation matters and all the other matters 

under Dodd-Frank where we have rulemaking, we set up public email boxes where people can send in their comments even before 

we start with public rulemaking, so that we are able to take those 

into account as we get the rules ready for the public; and then, as 

always, will benefit from the public comment that comes in. 

We are also meeting with many interest groups and posting the 

agendas from those meetings on the Web site so the people can see 

the topics that are under consideration. We agree it is very important that we have all the due diligence we can have so that these 

rules work well. 

Mr. MOORE OF KANSAS. Thank you. Any comments, Mr. Steckel? 

Mr. STECKEL. Yes. Chairman Bair has made this issue a priority, 

before and after passage of Dodd-Frank. We think Dodd-Frank 

helps us to our end and we are going to continue to pursue this 

vigorously. 

Mr. MOORE OF KANSAS. Thank you. And I have one more question. We have all focused on what went wrong in the financial crisis and I think it is very appropriate, but I think it is equally as 

important to learn from the responsible actors and build on their 

successes. 

So last month the oversight committee I chair held a field hearing in Kansas to learn from responsible Midwest banks and credit 

unions who were not the cause of the financial crisis. 

And my question is, with respect to the new executive compensation rules that your agencies are drafting and implementing, what 

will it mean for community banks and credit unions? And in the 

18 

rulemaking, are you avoiding one-size-fits-all approaches that may 

unfairly discriminate against smaller firms? 

Mr. ALVAREZ. Sir, we have been quite clear in our guidance that 

we expect the types of adjustments on incentive compensation to 

vary based on the complexity, size, and use of incentive compensation by firms. So smaller banking organizations tend to not use incentive compensation very much, and they also have short, flatter 

organizations, much easier to police, and understand the risks that 

are associated with incentive compensation. So we haven’t seen a 

problem coming up with smaller organizations. So our guidance 

makes allowance for that. 

Mr. MOORE OF KANSAS. Thank you. 

Ms. Cross? 

Ms. CROSS. I will cover your question as it relates to the other 

executive compensation rulemakings since the banks are really for 

my fellow regulators. 

There are numerous provisions in the Dodd-Frank Act that tell 

us to consider the impact on small business as we implement the 

rules, and we will carefully, carefully do so and request comment 

so that we can calibrate the rules appropriately, so that we don’t 

unduly burden small business. 

Mr. MOORE OF KANSAS. Thank you. 

Mr. Steckel? 

Mr. STECKEL. Yes. I think you are right. There are an awful lot 

of small banks that use limited, if any, amounts of incentive compensation as part of their business model, and we will specifically 

not target them. I don’t think they are the problem that we are trying to address here. 

Mr. MOORE OF KANSAS. Thank you very much to the witnesses. 

Mr. Chairman, my time is nearly up. I yield back. 

The CHAIRMAN. The gentleman from North Carolina. 

Mr. MCHENRY. Thank you, Mr. Chairman. 

I certainly appreciate your testimony. I wasn’t here for your 

verbal testimony, but I have read your testimony. 

How do you plan to deal with multinationals? Section 953 has 

been cited by some as a logistical nightmare. How do you intend 

to deal with an individual’s compensation to the overall firm’s earnings and income that is not simply a domestic bank but a multinational? 

Ms. CROSS. I think that one is for me. We are just beginning the 

rulemaking process, and we expect to propose the rules under 953 

next summer. It doesn’t have the same deadline, so we will have 

the opportunity as we prepare the rules to get input from everyone 

about how we should address those concerns. 

We have heard that there are worries about the logistics of figuring out the pay in a multinational firm. So we are looking 

through those provisions now, working with all the interested parties, and we will put together a rule proposal we think can best implement it in a way that is workable. 

Mr. MCHENRY. Okay. So, generally speaking, you are going to do 

what you normally do, which is you are going to input and make 

a rule; that is basically what you are telling me? 

Ms. CROSS. The Act directs us to adopt a rule to implement that 

provision. So we are doing what we are tasked to do under the Act. 

19 

If we run into problems, we will let you know, and we will come 

back if it is something that isn’t workable, but we would first like 

to try to see if the rule can be implemented in a way that results 

in implementing what we have been tasked to do in a way that is 

workable. 

Mr. MCHENRY. Okay. Yes. 

Mr. ALVAREZ. One thing I would add, in the banking area, there 

is an awareness worldwide that incentive compensation practices 

need to change, and we have been working with some of our foreign counterparts, especially through the Financial Stability Board, 

to develop standards that are being used on an international basis. 

Our guidance is very much in tune with the international direction 

of the FSB. So we are actually heartened that the other parts of 

the world are seeing the importance of all of us moving down this 

road together. 

Mr. MCHENRY. How important do you think that is with basically foreign standards that are similar to ours? 

Mr. ALVAREZ. I think it is very important because of the incentives that are created. We don’t want to lose our best talent to foreign competitors or have businesses move offshore in order to avoid 

incentive compensation rules. So it is important that this be an 

international work. 

Mr. MCHENRY. Certainly. 

Now, Ms. Cross, you mentioned to my colleague from New Jersey 

that weighing the balance of pay, an individual’s pay, whether 

that—the potential gain outweighs the systemic risk, that is basically what you are—similar to what you said; isn’t that right? 

Ms. CROSS. That is right. 

Mr. MCHENRY. Isn’t that in many respects in the eye of the beholder? 

Ms. CROSS. Again, I think that I would like to emphasize that 

we don’t envision micromanaging the pay of any particular individual. It is much more of a structural question. So, as you develop 

guidelines or regulations that set forth standards for how the pay 

is to be structured, limitations really on the structure of pay that 

would present those risks, as in the guidance that has already been 

issued, you would look in terms of, what risk does it pose for the 

company, and are they appropriately calibrated? Yes, it is in the 

eye of the beholder, but the compensation experts have significant 

input and have, I think, reflected in the guidance that you can calibrate it to appropriately reflect risk. 

Mr. MCHENRY. So, therefore, a trader and a CEO can have different rules? 

Ms. CROSS. I think that is right. I think there would be different 

structures that would be appropriate for a trader versus a CEO. 

Mr. MCHENRY. Okay. But even in the case of some similar failed 

institutions that the Federal Government has a significant ownership interest in currently, in different sections, different divisions 

of the company, you have people compensated in very similar ways. 

One lost billions of dollars for the institution; the other made hundreds of billions of dollars for the institution. So even with basically 

the same incentive packages, you are going to have widely variant 

outcomes and widely different systemic risk based on the nature of 

their business; is that fair to say? 

20 

Ms. CROSS. I think that has historically been the case. And I 

don’t want to speak for the folks who have already done this, but 

the horizontal review they have been going through to find out 

what are the compensation practices throughout these organizations should help us as regulators develop guidelines that would be 

appropriate so that is more appropriately calibrated throughout the 

organizations. 

The CHAIRMAN. If the gentleman would yield, I would acknowledge when I called this hearing I was thinking frankly about the 

provisions that we initiated, which was the say-on-pay and executive piece. The Senate added that other piece, and I share some of 

the questions about that. I think it was imprecisely worded. It is 

not clear. 

It seems to me if you look at the wording literally, an inappropriately large number of people are involved in the comparison, and 

obviously if that can be worked out, okay. But we are very much 

open to try to fix that legislatively because that was the Senate 

piece, and you are right. It is appropriately on the table. 

Mr. MCHENRY. And let’s understand that truly the debate is not 

between Democrats and Republicans. The true enemy is the Senate. 

The CHAIRMAN. In this case, there is the House-Senate difference. 

Mr. BACHUS. Could you further yield? And I appreciated those 

questions. I thought they were insightful. 

One of the things that I know in the written testimony that you 

address, similar to that last question, is that compensation doesn’t 

vest immediately, and therefore, although a trade may have a 

short-term positive, it may be a long-term disaster. And we talked 

about the bad-tail risk, and even if you have one trader who makes 

a half billion dollars, you have another trader who gets wiped out 

for $2 billion—which we have seen, a very large amount. So the 

fact that one could make and one could lose, if the one that loses 

bankrupts a corporation, that is a serious risk. 

But the other thing is, that often you can maximize short-term 

profits at the sacrifice of long-term profits. 

The CHAIRMAN. If the gentleman would yield. I think we all 

agree that is why we haven’t tried to be too rigid but have given 

discretion to the regulators, precisely on that compensation. 

The gentleman from Minnesota. 

Mr. ELLISON. Thank you, Mr. Chairman, and thanks for pulling 

this hearing together. I only have a few questions. 

My first question is, in light of the passage of the Frank-Dodd 

bill, the provisions on compensation, have you seen adjustments 

within the industry? Have you witnessed any sort of a self-correcting conduct that would sort of align compensation with proper 

incentives for the company? 

Mr. ALVAREZ. We have been doing a horizontal review where we 

are actually looking at the practices, and we are finding that institutions are taking steps on their own. They have identified some 

of the very same problems that we had identified in the guidance. 

They want very much to remove incentives to folks to increase risk 

behind the backs, as it were, of the control systems these organizations have put together. So we are finding good cooperation. There 

21 

are still a lot of uncertainties. There is still a lot of work that needs 

to be done. 

One of the things, for example, that is difficult is getting good 

metrics for risk. Some areas are easier to identify risks than others. You may be able to identify, for example, mortgage loans and 

the loss rates on mortgages, but it is not always easy to identify 

if a certain strategic move is going to work out. So it takes some 

time for those things to develop. 

So we continue to work with organizations to find good metrics 

and to use judgment that is well informed when there are not good 

metrics, but as a general matter, we think the institutions are willing and interested in making change. 

Ms. CROSS. I would note that the concept of finding out whether 

pay creates inappropriate risk is a relatively new idea that people 

are just learning about, and so, for example, particularly at the 

nonbanks, the sort of rank-and-file public companies, they are in 

the process now of doing inventories of their incentive programs 

and figuring out, do these create inappropriate risks for the companies? And it has been a very good exercise I think for boards to 

hear what kind of programs there are and what kind of risks they 

may pose, and then the companies over time can revise those programs. So I think this is not just at the financial institutions. I 

think it is throughout our capital markets, which is a very healthy 

thing. 

Mr. STECKEL. I would add that we see banks paying a lot more 

attention to this recently than say a few years ago. Both the passage of Dodd-Frank and also a lot of bad press that was out there 

about these companies pushed them in that direction. We also 

think that the rulemaking that is required under Dodd-Frank is 

also necessary to make sure we don’t, over time, backslide to some 

of the bad practices that occurred years ago. 

Mr. ELLISON. Can you all report on what you are seeing about 

these rules and the legislation and the application of the rules that 

are being promulgated on people who work below the top executive 

level? So many decisions are not made at the top executive level, 

and I think it is important we pay attention to those incentives as 

well. 

Just a very quick story. I met with a group of people who worked 

in a bank, and they were told they couldn’t hand back over overdraft fees that they were urged to push people to open up new accounts, and these are people on the bank level working with customers. Their incentives were to have people open up more accounts so they would generate more fees, have, you know—not 

push back overdraft stuff, and there is just a lot of pressure on 

these line employees. I don’t think this will work—do you see that 

this bill could affect the way they are compensated? Do you see it 

traveling down that far? 

Mr. ALVAREZ. Our guidance specifically provides that it must. We 

don’t deal just with senior executives. We deal with any employee 

or group of employees who can increase materially the risk to the 

organization. 

And what we had in mind, another example, are mortgage originators. Mortgage originators may not make very much money 

themselves individually. On the other hand, it is important that a 

22 

firm understand the incentives it creates when it gives bonuses to 

those folks. Is it encouraging them to just increase volume without 

regard to risk or increase the volume without regard to compliance 

with the law? There are lots of things incentive compensation practices in the mid-2000’s did that I think we all regret now. 

So one of the things we have been trying to do—and this is an 

area where I think there needs to be a little more work by banking 

organizations—is to identify those groups who are lower paid employees but who do receive incentive compensation and do, as a 

group, add risk to the organization. 

Mr. ELLISON. Are you in a position to hear from some of those 

employees? Because I can tell you that some of them are a little 

nervous about talking to me. I had to promise not to identify their 

company. They told me about a lot of pressure tactics they were 

under. Is this something you have been able to do is to hear directly from them? 

Mr. ALVAREZ. We do hear directly from some employees through 

a variety of ways. We also are getting the actual incentive compensation policies that apply to them so we have a chance to look 

at the actual document. 

The CHAIRMAN. If the gentleman will yield, that is a very important point. We will work with our colleague to make sure that we 

have channels whereby that kind of information can be sent along 

in a way that would protect the individuals. We will work with you. 

The time has expired. I thank the panel. This has been useful. We 

have a work in progress here. 

I will say there are some of these things initiated in the House, 

some in the Senate. My own view, as was indicated by the questions from my colleague from North Carolina, is that the House 

pieces were somewhat better organized than the Senate piece and 

that more work will have to be done on that, and we will be working with you on it. We don’t rule out the possibility that it will 

have to be further amended. 

I thank the panel. 

I now call up Martin Baily and Darla Stuckey. Thank you. 

And we will begin with the testimony from Martin Baily, who is 

a senior fellow at the Brookings Institution, and was part of the 

Squam Lake bipartisan group of economists who had significant 

government service who met to discuss this, and Mr. Baily is a 

former chairman of the Council of Economic Advisers. 

Would someone please close the door, as you will never know 

who will wander in here? 

Mr. Baily? 

STATEMENT OF MARTIN NEIL BAILY, SENIOR FELLOW, THE 

BROOKINGS INSTITUTION 

Mr. BAILY. Thank you, Chairman Frank, Ranking Member Bachus, and members of the committee. It is a great privilege to be 

here. 

In a sense, I guess, I am representing the Squam Lake group. 

I do want to mention that I think they see themselves primarily 

as a group of finance academics. There are a few of us who have 

served in government. I was in the Clinton Administration, as you 

mentioned. Fred Mishkin was at the Federal Reserve. Matt SlaughVerDate Nov 24 2008 18:42 Dec 17, 2010 Jkt 062685 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 K:\DOCS\62685.TXT TERRIE
23 

ter was in the Bush Administration. But most of the group are actually finance academics, and they got together in an attempt to 

see if there is anything from finance theory and practice that could 

contribute to financial sector reform. 

It is also, as you said, a range of views. Sometimes, we have had 

to be sort of dragged together to form a consensus, and I do want 

to say one or two of the things that I will say today may not represent the views of the whole group. 

Let me get started then. I think the Dodd-Frank Act made substantial steps forward towards improving regulations but, obviously, left a fair amount to be done by the regulators. So I think 

it is very appropriate. I applaud you for holding meetings such as 

this. 

Some of this, as was mentioned earlier, has to be done at the 

international level, and historically, the international level hasn’t 

been a great forum. The Basel process has not been either timely 

or effective. There is some sense, I think, that the financial crisis 

lit a fire under them, and they are doing a better job now, but that 

is something certainly we have to monitor. 

Now, the two recommendations from the Squam Lake group that 

relate to compensation are, first, to discourage any regulation of 

the level of the compensation, and we have had already quite a bit 

of discussion of that, and that is in line with the Dodd-Frank Act. 

So I don’t know I need to say a lot about it. 

I think if I were to make one comment it is that we do indeed 

have a very wide and widening income distribution in our economy, 

but it is a much more fundamental problem than just the financial 

sector. It has to do with, are we providing the right skills to people; 

do we have the right tax system, and so on. So I don’t think that 

was a matter for financial regulation. I agree with you, the decision 

you have made about the level. 

Our recommendation is that the regulators should look at the 

structure of compensation to make sure that it is aligned with the 

interests, not only of shareholders in the institution but also of taxpayers who may get called upon to bail out this institution, and I 

know we have put in place various steps so that we should not 

have to bail out financial institutions, but we don’t know what is 

going to happen in the future, and I think it is an important tool 

in the arsenal to make sure that we have the right compensation 

structure to reduce that possibility. 

We want to make sure that when executives are making decisions about the risks they are taking in their own institutions, they 

are not sort of in the back of their minds thinking, if things go 

wrong, I can get supported by the taxpayer, either in the form of 

the FDIC or somewhat in the way that happened, unfortunately, 

in the crisis. 

A major goal of capital market reform should be to force financial 

firms to bear the full cost of their own actions, and as I said, we 

propose several mechanisms and there are such in the Dodd-Frank 

Act to do that, but compensation is a useful tool. 

Systemically important financial institutions should withhold a 

significant share of each senior manager’s total annual compensation for several years. The withheld compensation should not take 

the form of stock or stock options. Rather, each holdback should be 

24 

for a fixed dollar amount, and employees would forfeit their 

holdbacks if the government goes bankrupt—excuse me, if the firm 

goes bankrupt or receives extraordinary government assistance. So 

we want to make a very direct link between taxpayer interest and 

incentive on the senior managers of the company. We want to hold 

them accountable for the possible failure of their company. 

Now, I talk in my written testimony a little bit about what is 

currently in the Dodd-Frank Act versus our proposal. I talk a little 

bit about what regulators are doing. We have heard about that already here. I talk a little bit about what has been proposed in the 

U.K. financial services authority because, as was noted earlier, it 

is a good idea to have harmonization, and obviously, London is the 

other main financial center. This should be more broad than London, but that is obviously the biggest alternative to New York as 

a financial sector. 

So let me just draw my conclusions. I am running out of time already. Here I will express my one concern about whether the 

Squam Lake— 

The CHAIRMAN. We understand. Take another couple of minutes. 

We have only a few people. So take another couple of minutes. 

Mr. BAILY. You shouldn’t encourage me to blab on, but I will finish quickly. 

My only concern with the Squam Lake recommendation is 

whether or not it goes quite far enough, deep enough down the organization. If you have a large organization and an international 

organization and you are a trader and you see the benefits to you 

in terms of your bonus of taking on certain kinds of risks, I think 

the notion of worrying about taxpayers or if the firm might actually 

go broke and have to be put in receivership with the FDIC or something, that may seem a little bit too remote. 

So the way in which I myself would go a bit further—and it is 

along the lines of the testimony that was given earlier—is that 

each company should work with its regulator, the Federal Reserve 

or the FDIC or the SEC, to describe what their compensation structure is, how it lines up with their own internal risk management 

structure, and that they are, in fact, providing the right holdbacks 

for traders and for other folks within the company to make sure 

that we don’t go to the edge of the precipice; in other words, that 

we build in incentives for traders that might take big, risky bets 

but that wouldn’t necessarily drive the company into bankruptcy 

but would pose additional risks on the system. 

But I do stress that not everyone at Squam Lake agrees with 

that. There was a good bit of concern among members of the 

Squam Lake group that we don’t want to overregulate this. And I 

agree with that. We want to maintain incentives for performance, 

for innovation, all the things which help this be a dynamic sector. 

I will stop there. Thank you, Mr. Chairman. 

[The prepared statement of Mr. Baily can be found on page 49 

of the appendix.] 

The CHAIRMAN. Thank you. 

Next is Darla Stuckey, who is the senior vice president for policy 

& advocacy for the Society of Corporate Secretaries and Governance Professionals. 

Ms. Stuckey. 

25 

STATEMENT OF DARLA C. STUCKEY, SENIOR VICE PRESIDENT, 

POLICY & ADVOCACY, SOCIETY OF CORPORATE SECRETARIES AND GOVERNANCE PROFESSIONALS 

Ms. STUCKEY. Thank you, Chairman Frank, and Ranking Member Bachus. 

I am here today on behalf of the Society of Corporate Secretaries 

& Governance Professionals. Our members include corporate secretaries, securities lawyers, compliance officers, and even some executive compensation plan administrators. They work in companies 

of every size and every State and in every industry. I would love 

to talk more about us, but if you would like to know more, please 

go to governanceprofessionals.org. 

You have asked for our views on the effects of the implementation of the compensation-related provisions of Dodd-Frank, particularly as they affect risk taking and particularly in the financial 

services area. Without taking a position on the impact of the Act 

specific to financial services companies only, since all companies 

are covered by Dodd-Frank, we do believe that the governance 

changes under Dodd-Frank, along with the SEC rules implemented 

since the crisis of 2008, generally will help companies manage and 

oversee risk and further corporate accountability. 

Our members who are financial services companies simply request that the SEC, the Fed, and the FSA coordinate their compensation rulemaking and do so soon. 

You also asked for our views on what the Federal regulators 

should consider, so I now turn to three of the executive comp provisions, and I apologize if you have spoken about these in the first 

panel at length, but I will talk about say-on-pay, a little bit on pay 

ratio, and clawbacks, as well as I would like to talk— 

The CHAIRMAN. No apology. We want your opinion. The fact that 

the other people talked about it makes your opinion even more important. So, please, go ahead. 

Ms. STUCKEY. Okay. Thank you. I also would like your indulgence to talk a minute or two about the whistleblower provision in 

Dodd-Frank, which is not specifically executive comp related, but 

is very important. 

First, say-on-pay and say-when-on-pay. You know what say-onpay is, the shareholder vote on executive comp. It is effective for 

meetings after January 21, 2011. Our only concern with this is that 

the SEC’s schedule as submitted may be too late. We urge the SEC 

to propose these rules soon in October, so the rules will be out in 

early January so we can hit the January 2011 target. Given the 

short timeframe that we have, we suggest they implement rules 

similar to the TARP companies. They have had it for the last 2 

years. Our members would use that as a model and get that done. 

The Act also requires companies to give shareholders a vote on 

how frequently—this is what we call—how frequently they should 

get say-on-pay, we call say-when-on-pay. I guess the SEC calls it 

say-on-pay frequency. 

With respect to say-when-on-pay, SEC rulemaking should provide boards a choice this year whether to offer a resolution with 

their own single recommendation, for example, 2 years; or to give 

a multiple choice resolution where the shareholders could pick: A, 

B or C; 1, 2 or 3 years. We believe that this has to be driven by 

26 

boards and managements. They are in the best position to recommend the frequency to ensure that the timing of the vote is 

aligned with respect to compensation programs, many of which are 

driven in 3-year increments. The shareholders will be able to express their views. 

Finally, on this one, the SEC should clarify that a shareholder 

proposal seeking an alternative 1-, 2-, or 3-year scheme would be 

excluded from a proxy statement. This would avoid unnecessary 

uncertainty or a conflict with the company’s resolution, and we 

don’t think it was your intent to have say-when-on-pay votes every 

year in the 6-year period. 

Pay-ratio disclosure, I heard some of the colloquy. As you know, 

it does, by construction, apply to all employees. We would hope 

that all employees becomes all U.S. employees for U.S. companies 

and all U.S. full-time employees. We realize this rule won’t be implemented until next summer or looked at until next summer, but 

we think that we need technical clarifications during this time, and 

we believe that the clarifications should be driven by intent and 

practical reality, which you have already heard. We don’t believe 

that it was Congress’ intent to include workers all over the globe 

to compare to U.S. CEO’s, and in addition, it is quite, quite burdensome. 

One other thing that would help immensely with this and that 

we believe the statute should be clarified to provide is that total 

comp means total direct comp. That is cash: that is base salary, 

cash bonuses, equity comp, but not pension accruals, 401(k) 

matches, and other noncash items. 

Clawbacks: The Act also requires companies to implement policies to recapture incentive comp that would not otherwise have 

been received in the event of a restatement. This clawback provision is mandatory, provides no board discretion, covers all present 

and former executive officers, does not require misconduct, and has 

a 3-year look back; it goes well beyond existing law and practice 

today. Our biggest concern with this is that boards must have some 

discretion in this area to implement a clawback. At the least, it 

must be allowed to determine if recoupment would cost more than 

the expected recovery amount is worth; that is, whether you have 

to pursue litigation to get it back, the likelihood of recovery, whether it violates any employment contract, and there are also some 

State law concerns, that it would violate State law provisions. 

Surely Congress didn’t intend to require clawbacks even where 

the recovery is less than the cost to recover it. For this reason 

alone, it is very simple: Boards must be given some discretion. So 

we urge the SEC to do that in its rulemaking, and at this point, 

I would recommend to you there is a letter from the Center on Executive Compensation attached to my testimony. 

The CHAIRMAN. Letter from whom? 

Ms. STUCKEY. The Center on Executive Compensation. It is attached to my written testimony. 

The CHAIRMAN. Center for? 

Ms. STUCKEY. Executive Compensation. 

Finally, I will turn now to the whistleblower bounty provision, 

and I appreciate your indulgence. 

27 

It is in every company’s best interest to have a robust compliance 

program, but the SEC and the U.S. Sentencing Commission strongly support effective in-house compliance programs that can prevent 

and detect criminal conduct or other wrongdoing. 

Section 922 of Dodd-Frank states that the SEC shall pay an 

award to whistleblowers in cash between 10 and 30 percent of any 

money they receive over $1 million that either they collect, the U.S. 

Attorney collects, any other SRO or any State Attorney General, as 

a result of the whistleblower’s assistance. Importantly, the bounty 

depends on whether the informant provides original information to 

the SEC. That is, if an employee is aware of a potential violation 

and wants to report an issue, he now has to choose whether to 

raise it to the company or with the SEC. 

Employees have long been trained to raise issues first with their 

superior, alternatively with an ombuds or an ethics hotline or even 

to the chair of the company’s audit committee. 

Under the new whistleblower provisions, an employee will now 

have a significant financial incentive to bypass raising the issue 

with the company at all for fear of losing the bounty, because if he 

raises to the company first, the company might beat him or her to 

the SEC. 

And if you believe the New York Post, the threat is real. Yesterday, the Post reported that when the new movie, ‘‘Wall Street: 

Money Never Sleeps’’ opens Friday, today, moviegoers will see an 

advertisement prior to the movie recruiting whistleblowers who 

know of misconduct at their companies. The ad will inform people 

of the potential riches that can come with being a whistleblower, 

letting them know that they can make money and also do a good 

thing. The ads also tell people that they can remain anonymous, 

and it also provides them with the address of the new whistleblower Web site, SECsnitch.com. 

We don’t believe this was the intended result of this provision, 

having employees bypass their companies. It is contrary to long-established public policy, and it also undercuts the well-established 

internal compliance programs put in place after SOX that companies have spent so much money on. 

We suggest that the statute grant bounties but not on the condition that the whistleblower bypasses the company. 

Finally, we believe the SEC should refer to the defense and 

health care industries, which have long had to deal with false 

claims cases and have experience in this area. 

I encourage you to review my written testimony, and I think my 

time is up. I thank you. 

[The prepared statement of Ms. Stuckey can be found on page 86 

of the appendix.] 

The CHAIRMAN. I thank both of the witnesses for their testimony. 

Let me say to Ms. Stuckey, as I did when the gentleman from 

North Carolina raised it, the provisions about all compensation, the 

comparisons, did originate in the Senate. We have some questions 

about it. I guess it would seem clearly there would be a consensus 

that it shouldn’t be every single employee. Now, I don’t know 

whether it was drafted with enough flexibility to allow that, but if 

necessary, we would have to step in. I think that is clearly the 

28 

case, and that was not one of the issues that we thought most important. 

So that would be our general sense would be to—we will be urging the SEC to narrow that, if possible, and if not, then we would 

do it statutorily if we have to, which clearly is necessary in that 

regard. 

Mr. Baily, you did note that with regard to how deep into the 

company we get, you had your own views they were not universally 

shared by the Squam Lake group. One question, is the Squam 

Lake group a one-time group? Are you guys going to hang out some 

more, or what can we expect from Squam Lake? 

Mr. BAILY. We are going to hang out more. There is some new 

stuff that is going on to look at, the GSEs, Fannie Mae and Freddie 

Mac and a couple of other things. One or two members of the group 

have made a graceful exit, but we are still in business. 

The CHAIRMAN. With regard to the GSEs, I would advise you not 

to waste your time to advise us on the post-GSE regime. There will 

be no more GSE’s. I think that is fairly clear. We will obviously be 

open to what would be replacing them, and that will be very important. The gentleman from Alabama. 

Mr. BACHUS. Thank you, and Mr. Chairman, I want to associate 

myself with Ms. Stuckey’s remarks about the SEC getting their 

rules on say-on-pay out as soon as they can because businesses 

need to make decisions, and it would be very helpful. It would give 

certainty, which is always, I think, a good thing. 

Let me go back to the question of Ms. Stuckey, for purposes of 

the median pay ratio disclosure, you said that it ought to apply 

only with U.S.-based full-time employees, and I tend to agree with 

you on that, but because this covers all—I am not sure anybody 

said this. This is not just financial companies; 953 applies to all 

public companies, which in itself, we have talked about financial 

companies getting in trouble and the safety net. But would you go 

ahead and just explain for the record why you believe only U.S. 

employees. 

Ms. STUCKEY. Sure, I would be happy to. I don’t believe—it sort 

of caught our group by surprise and I understand that there is 

some appeal and there have been statistics quoted by the media in 

the past about average worker pay to CEO pay, and I am not sure 

how correct those are. So I can understand why someone would 

want to know what the average worker makes. 

We don’t really think that institutional shareholders particularly 

care about this number, but companies are willing to implement 

Congress’ intent, and it could be hugely burdensome. And without 

sounding like I am whining, if you are a multinational company 

and you have 100,00 employees in 20 or 30 or 40 countries, there 

are lots of pitfalls. There are cross-border issues, like exchange 

rates. There are privacy laws in France, for example, that might 

not even allow you to do this, all kinds of things. So if you are willing to work to make this only U.S. employees, a lot of corporate 

secretaries and human resource professionals will breathe easier. 

So this is a situation where we don’t think the cost would outweigh 

the benefit of what the number is. 

And the reason why we don’t think that the pension number 

should be included is the pension number certainly is known for 

29 

the CEO and the top five folks, but in order to find the median employee, it is very different than finding an average. You have to do 

an actuarial pension calculation for each of your 8,000 people, say, 

in the pension plan, and that is for a medium-sized energy company in the Midwest that I spoke to. 

To do a pension calculation for 8,000 people and line them up in 

a row and pick the middle guy or gal, that is a huge burden. So 

we would urge you not to include that at all, but even if you wanted to include that, to allow the calculation to be done without that, 

find the middle person, then add the pension back in and then do 

the ratio, if you understand what I mean. 

Mr. BACHUS. I do and let me say this. I agree with you that this 

would be a very burdensome problem. 

Mr. Baily, do you have any comment on it? 

Mr. BAILY. I am quite concerned about the level of poverty in the 

United States. I am quite concerned about the fact that ordinary 

workers have not done very well in the last few years. I don’t see 

how publishing that ratio helps anybody very much. So I am not 

a big fan of that. 

The CHAIRMAN. If the gentleman would yield, I would note again, 

that was a Senate provision, and I think our inclination is to see 

to what extent it can be lessened as a burden, and if not, we would 

be able to work to try and change that next year. 

Mr. BACHUS. I think that is very helpful, and I think there is 

somewhat of a consensus building. 

Ms. Stuckey, what are some of the other potential hurdles or pitfalls to public companies complying with the Dodd-Frank compensation provision? 

Ms. STUCKEY. I can mention one that I cut out in the interest 

of time, and that would be the pay versus performance disclosure. 

There is a new provision that the SEC provide rules on this, and 

I think companies are anxious about this because they want the 

rule to be written flexibly enough to explain, whether it be in draft 

form or not, how compensation actually paid is tied to performance. 

The current compensation structure of the current chart is not 

easy to understand. And they want to be able to tell—boards and 

comp committees want to be able to tell their story, to explain 

which point in time relates to which compensation, and that some 

compensation may be granted in year one. It may be a reward for 

a past year’s performance. It may be incentive for a future year’s 

performance. Some compensation is based on just 3-year straight 

line performance pay based on net income. 

But they want to be able to show that at the bottom level, and 

you may not want to hear this, but at the bottom level, they want 

to be able to show that their executives are vested, just like the 

shareholders, and when the share price falls, they hurt, too. So 

their options become underwater, and the comp number that 

maybe the media reports isn’t really what they got. So we want the 

SEC to write rules flexibly enough so that companies can tell that 

story. 

Mr. BACHUS. Okay. Thank you. 

Mr. Baily, do you have any comment on that? 

Mr. BAILY. No, I don’t have any further comment on it. 

Mr. BACHUS. Thank you. 

30 

Thank you, Mr. Chairman. 

The CHAIRMAN. I would note again that the provision just being 

discussed is another United States Senate provision. So we will be 

approaching with some—we will take a fresh look at it. 

The gentleman from Florida. 

Mr. POSEY. Thank you, Mr. Chairman. 

Mr. Baily, did I hear you correctly that before employing employees who should or could be subject to executive compensation requirements, that they should work with the FDIC, the SEC or whoever ahead of time before they make arrangements to employ these 

people, that they should work with them, they should go to a bureaucrat and get their plans approved or get some kind of warm 

and fuzzy from them? 

Mr. BAILY. Maybe I misstated or maybe I am misunderstanding 

your question. I think there is a process going on now where the 

regulators that are approving the risk-management structures 

within companies so that they are meeting risk-management 

standards are asking them to explain what their policy is on compensation. 

It is not that I want them to say, this is the amount going to 

each employee and we are going to approve that going to each employee. No, I don’t think that is a good idea at all, but what is their 

policy and does it meet the requirements for risk management, 

both in terms of their own desire to reduce risk within their institution and to make sure that they are not putting taxpayers in risk 

should something happen to the company? 

Mr. POSEY. Did I understand correctly—and I will look at the 

transcript—but you suggested they should go to the FDIC, the SEC 

or someone beforehand to make sure that their plans are going to 

be compliant in advance, like there is some latitude given to the 

bureaucrat to make this judgment call, and they would have some 

type of influence on the committee who is setting the compensation 

outside of clear and unambiguous rules that apply to everyone that 

should be easily understood by the sector of this country that provides jobs and produces and gives us a GDP that we enjoy, that 

regulates a lifestyle that we had, that we are going to have those 

people go to a bureaucrat and get an opinion or try and get some 

kind of feel good signal in advance before they cut a deal? 

I hope that is not what you said and that is not what the transcript will say because I find that appalling. I find that is probably 

the quickest way to destroy the economic system we are trying to 

get to recover, but that would probably do more damage than anything else when you have that kind of intrusion, unclear, very ambiguous, could be arbitrary, could be capricious, affecting private 

companies’, public companies’, opportunity to do business. 

I would think that you would say, here are the rules, if you don’t 

go outside that box, you are okay. If you go outside that box, you 

are in trouble. Or maybe that you will establish, instead of a zillion 

different rules, say here’s the new fiduciary standard, you have this 

fiduciary standard to your stockholders, and it would be a jury in 

question whether or not you break that fiduciary standard, and if 

you do break it, the consequences are severe. 

Thank you, Mr. Chairman. 

31 

Mr. BAILY. I certainly did not wish to create arbitrary and capricious rules or to create a system in which you have to have necessarily warm-and-fuzzy relationships with bureaucrats. So I, too, 

will look back at the transcript and make sure that I was saying 

something that I want to stand by. 

I do understand very much the need to have incentives and opportunities and that businesses be allowed to run their operations, 

as long as the policies they are following—and there should be 

clear rules about this, I agree with you again on that—so that 

within the rules, they are not imposing excessive risk on taxpayers. 

Mr. POSEY. The biggest disincentive in the world is for you to 

have to clear your decisions with a government bureaucrat on any 

level. I just think the suggestion that you need some kind of government approval after you have made your decision, inside the 

box of the guidelines that are established, that should be clear, unambiguous is just staggering to the imagination. 

Mr. BAILY. I take your point. 

The CHAIRMAN. The gentleman from North Carolina. 

Mr. MCHENRY. Thank you, Mr. Chairman, and I certainly appreciate the testimony. 

And Mr. Baily, your discussion began with, I think, a key point, 

which is income distribution deals with a lot larger set of issues 

like skills, education, training, the ramifications of the Tax Code, 

really the provisional incentives the Tax Code puts in place, and 

I appreciate you mentioning that at the beginning, because I think 

the one key thing that we can do as a matter of governmental policy is make sure that there is a skill base out there so that we can 

have a very diverse, very active economy, and appreciate you starting with that, and that is something that is of issue to me and my 

constituents at home. 

The question here today, the reason why we are even having this 

discussion is really at the heart, and I know the chairman has had 

this interest in executive comp for long before the financial meltdown. But the reason why we are talking about systemic risk and 

executive comp, well, compensation structures, is largely because of 

the Federal Government’s actions to prevent a complete and utter 

meltdown of the financial marketplace. Is that basically your view, 

Mr. Baily? 

Mr. BAILY. I am sorry, could you just repeat the last sentence? 

Mr. MCHENRY. Basically, the reason why systemic risk is the discussion is because the Federal Government had to bail out firms, 

right? 

Mr. BAILY. Yes. 

Mr. MCHENRY. Then you look at the overall structure, and you 

said, of course, you got paid millions if you did ‘‘X,’’ if you failed, 

and you got paid billions if you succeeded, so of course, the incentive is to not worry about failure; somebody else will pay for it. 

My concern is this: We write a regulation, and to Ms. Stuckey’s 

point, you have three or four different regulators, they write three 

or four similar regulations but just dissimilar enough, that you 

can’t really please everyone, and then they stay on the books. And 

in the end, the marketplace figures out a way, with the force of 

money and the power of money and the power of ideas in order to 

make more money as individuals, and they get around it. So basiVerDate Nov 24 2008 18:42 Dec 17, 2010 Jkt 062685 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 K:\DOCS\62685.TXT TERRIE
32 

cally, it is great. Congress feels good. We have stuck it to these 

folks that were making all this money, and we feel good, and in the 

end, it nets out with nothing. Is that a concern that you have, Mr. 

Baily? 

Mr. BAILY. Yes, it is a concern. 

Now, as we discussed a little bit in the earlier panel, one response to that is that many of these companies, and I think maybe 

that is a little also in answer to the earlier question, a lot of these 

companies are themselves reforming their own compensation structures, so they are not saying, oh, no, we don’t want to do that. 

Some of them actually did it before the crisis. Some of the better 

companies and more enlightened companies had pretty good compensation structures, and they did withhold bonuses over several 

years, and in most cases, those companies fared better over this 

crisis than the ones that did not. 

So I don’t think we are pushing this down the throats of most 

companies. We are trying to do things that, by and large, they are 

doing on their own. 

The only thing that we added I think in the Squam Lake Report 

was to make sure we don’t just end up with systems that kind of 

align the employees with the shareholders, meanwhile forgetting 

that taxpayers could be on the hook. And so we want to make sure 

that at the level of incentive, particularly to the CEO, but to senior 

management, that they know that some of their pay is on the line 

if taxpayers have to get involved and so we can help avoid some 

of these bailouts that we had. 

Mr. MCHENRY. Would you agree that the best way for this to actually happen is not through a government regulation but through 

a corporation’s reform within? 

Mr. BAILY. I think there is an interest in—we do have supervision and regulation of our financial institutions. So I don’t think 

we can just leave it to the companies themselves to do it. I think 

we have to make sure that it is being done in a way that protects 

us as taxpayers rather than just leaving it to— 

Mr. MCHENRY. Beyond financial firms. 

Mr. BAILY. Oh, beyond financial firms? 

Mr. MCHENRY. I think that is an answer. 

Mr. BAILY. I can certainly come back with a response, but if 

these are not companies that are going to get bailed out or receive 

government interest, by and large, they should do their own thing 

without the interference of the government. 

Mr. MCHENRY. Okay. And certainly it would be in the shareholders’ interests to ensure, such as say-on-pay, can have their sayso and take their capital away from firms that don’t have the right 

incentive structure where the CEO and the executives aren’t truly 

aligned with the interests of shareholders, and the marketplace can 

make that choice. And that is what many of us are saying. It is 

not that we certainly support certain compensation amounts. It is 

that we believe in the individual ownership of that company rather 

than government regulation. 

And finally, Mr. Chairman, I appreciate your indulgence, but to 

Ms. Stuckey’s point about total direct compensation versus an individual who has worked for a company for 30 or 40 years and started at the retail, checking people out, has worked their way up and 

33 

is number two in line to the CEO and, after 40 years, has a lot of 

deferred compensation, and it appears that he has a lot more direct 

compensation from the firm than he truly does. And I appreciate 

your interest, and I have folks in my district who have that very 

issue that it certainly overstates what they believe is really worthwhile to disclose. 

Ms. STUCKEY. I would agree, and I just, if you have 1 minute, 

I can give you a couple of other things, questions that have actually 

been raised by people attempting to gather the information: What 

do we do with 401(k) matches? What about mid-year employees or 

part-timers? People who have come on with an acquisition? What 

about severance? What about people who are downsizing, given 

their huge severance package because they have been there 30 

years and maybe you have accelerated their vesting, what do we 

do about that? What do you do about overtime and shift differential 

payments of hourly workers? And then, of course, there is the overseas currency, nonmonetary components, like apparently in overseas countries, many people get cars. Sometimes they even get 

food. There are a lot of things that might have to be valued. So 

that is the sort of nuts and bolts stuff that we are concerned about. 

Mr. MCHENRY. Thank you. 

Thank you, Mr. Chairman. 

The CHAIRMAN. I thank the witnesses. This will be an ongoing 

process, and this has been useful, and we will continue to work on 

it. The hearing is adjourned. 

[Whereupon, at 11:55 a.m., the hearing was adjourned.] 

(35) 

A P P E N D I X 

September 24, 2010 

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